UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

	ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

			For The Quarterly Period Ended: February 28, 2003

	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

			For The Transition Period From To

	Commission File Number: 0-14779

MEDIA 100 INC.
(Exact name of registrant as specified in its charter)

DELAWARE		04-2532613
(State or other jurisdiction of organization or incorporation)		(I.R.S. Employer Identification Number)

450 DONALD LYNCH BOULEVARD MARLBOROUGH, MASSACHUSETTS
(Address of principal executive offices)

01752-4748
(Zip code)

(508) 460-1600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $.01 per share		13,083,019 shares
Class		Outstanding at April 7, 2003

MEDIA 100 INC.

INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION
	ITEM 1	Consolidated Financial Statements:
		Consolidated Balance Sheets as of February 28, 2003 and November 30, 2002

		Consolidated Statements of Operations for the three months ended February 28, 2003 and February 28, 2002

		Consolidated Statements of Cash Flows for the three months ended February 28, 2003 and February 28, 2002

		Notes to Consolidated Financial Statements

	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	ITEM 3	Quantitative and Qualitative Disclosures About Market Risk

PART II - OTHER INFORMATION
	ITEM 1	Legal Proceedings

	ITEM 6	Exhibits and Reports on Form 8-K

SIGNATURES

CERTIFICATIONS

EXHIBIT INDEX

PART I - FINANCIAL INFORMATION

MEDIA 100 INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	February 28, 2003			November 30, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	3,344		$	4,573
Available for sale securities, at fair value	44			126
Restricted Cash	3,191			3,184
Accounts receivable, net of allowance for doubtful accounts of $407 in 2003 and $409 in 2002	2,135			2,435
Inventories, net	1,953			2,447
Prepaid expenses and other current assets	781			516
Total current assets	11,448			13,281

Property and equipment, net	1,687			1,870
Intangible assets, net	135			145

Total assets	$	13,270		$	15,296

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	996		$	1,295
Accrued expenses	5,766			5,588
Deferred revenue	3,910			4,504
Total current liabilities	10,672			11,387

Contingencies (Note 9)

Stockholders’ equity:
Preferred stock, $.01 par value Authorized - 1,000 shares, none issued
Common stock, $.01 par value, Authorized - 25,000 shares 13,113 and 12,977 issued and 13,083 and 12,947 outstanding at February 28, 2003 and November 30, 2002	131			130
Capital in excess of par value	218,393			218,319
Accumulated deficit	(215,671		)	(214,319		)
Treasury stock, 30 shares at cost	(78		)	(78		)
Accumulated other comprehensive loss	(177		)	(143		)
Total stockholders’ equity	2,598			3,909

Total liabilities and stockholders’ equity	$	13,270		$	15,296

The accompanying notes are an integral part of these consolidated financial statements.

MEDIA 100 INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended
	February 28, 2003			February 28, 2002
Net sales:
Products	$	3,557		$	2,852
Services	1,240			1,646
Total net sales	4,797			4,498

Cost of sales	2,462			2,238
Accelerated depreciation and amortization of fixed assets (Note 6)	—			248
Gross profit	2,335			2,012

Operating expenses:
Research and development	1,773			2,567
Selling and marketing	1,465			2,248
General and administrative	645			1,106
Amortization and write-off of intangible assets	—			492
Accelerated depreciation and amortization of fixed assets (Note 6)	—			634
Settlement of litigation (Note 7 and 9)	—			924
Total operating expenses	3,883			7,971
Operating loss	(1,548		)	(5,959		)

Interest income, net	24			78
Other income (expense), net	172			(84		)
Loss from operations before benefit from income taxes	(1,352		)	(5,965		)
Benefit from income taxes	—			(102		)
Net loss	$	(1,352	)	$	(5,863	)

Loss per share:

Basic	$	(0.10	)	$	(0.46	)
Diluted	$	(0.10	)	$	(0.46	)

Weighted average common shares outstanding:
Basic	13,039			12,636
Diluted	13,039			12,636

The accompanying notes are an integral part of these consolidated financial statements.

MEDIA 100 INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	February 28, 2003			February 28, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,352	)	$	(5,863	)
Adjustments to reconcile net loss from operations to net cash used in operating activities:
Depreciation and amortization	363			1,455
Non-cash settlement of litigation	—			924
Amortization and write-off of intangible assets	—			492
Changes in assets and liabilities:
Restricted cash	(7		)	—
Accounts receivable	300			767
Inventories	494			(708		)
Prepaid expenses and other current assets	(265		)	(242		)
Accounts payable	(299		)	(36		)
Accrued expenses	178			(780		)
Deferred revenue	(594		)	(191		)
Net cash used in operating activities	(1,182		)	(4,182		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of equipment	(152		)	(312		)
Purchase of intangible assets	(18		)	(10		)
Net proceeds from sales of marketable securities	82			8
Net cash used in investing activities	(88		)	(314		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	75			272
Net cash provided by financing activities	75			272
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(34		)	30
NET DECREASE IN CASH AND CASH EQUIVALENTS	(1,229		)	(4,194		)
CASH AND CASH EQUIVALENTS, beginning of period	4,573			17,369
CASH AND CASH EQUIVALENTS, end of period	$	3,344		$	13,175

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash (received) paid for income taxes	$	—		$	(102	)
OTHER TRANSACTIONS NOT USING CASH:
Change in value of marketable securities	$	7		$	—

The accompanying notes are an integral part of these consolidated financial statements.

MEDIA 100 INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED, EXCEPT FOR NOVEMBER 30, 2002 AMOUNTS)

1. Basis of Presentation

The accompanying interim unaudited consolidated financial statements include the accounts of Media 100 Inc. (“the Company”), a Delaware corporation, and its wholly owned subsidiaries. In the opinion of management, the interim consolidated financial statements and disclosures reflect all adjustments necessary for fair presentation. Interim results are not necessarily indicative of results expected for a full year or for any other interim period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest audited financial statements, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2002, filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Media 100 Inc., and subsidiaries (the Company) design and sell advanced media systems for content design. In the case of the Company’s newest and most advanced development, 844/X™, we have integrated the previously separate workflows of real-time video editing and the compositing of layers of video, computer graphics, audio, and metadata. We believe this workflow integration is a technical breakthrough that over time will attract existing and new video editing users who wish to be able to design more complex content that comprises dozens, even hundreds of distinct content layers. The Company has developed new technology—integrated software and hardware, including Application-Specific Integrated Circuits (“ASICs”)—to perform compositing in real time or at high speed to allow compositing operations to be performed within an editing environment and execute at high speed without host-based rendering, which is slow and impedes productivity.

The Company’s products are personal computer-based workstations configured with proprietary software and hardware that we engineer and manufacture. In some cases, particularly with 844/X, we sell our products as fully integrated systems, meaning we configure and ship the system to an end user, or reseller, with a host personal computer, our software and hardware, and optional disk storage; in other cases, we deliver only our software and hardware (“unbundled”), typically to an independent value-added reseller that configures the turnkey system themselves on behalf of an end user.

The Company has incurred an operating loss during the quarter ended February 28, 2003 and operating losses in the past five fiscal years. In addition, it has experienced negative cash flow from ongoing operations during fiscal 2003, and expects to incur operating losses and negative cash flows for at least the first half of fiscal 2003. The Company incurred a net loss of approximately $1.4 million for the quarter ended February 28, 2003 and as of February 28, 2003, the Company had an accumulated deficit of approximately $215.7 million.

The Company has already taken a series of actions to reduce the negative cash flow it experienced in the past fiscal year including the termination of employees, reductions in the salaries paid to executives and certain other employees, relocation of its facility to lower cost space and a reduction in the marketing expenses for existing products. However, these expense reductions will not be enough to return the Company to profitability without revenue growth. The Company’s current operating plan and cash flow projections assume a certain level of revenue growth and operating expenses. If the Company fails to achieve its revenue plan then management will realign operating expenses consistent with the revised revenue expectations at that time in order to conserve cash. The current cash flow projections also assume the Company will not require substantial cash for capital purchases or to fund substantial increases in inventory, accounts receivable or other assets and the projections assume the Company will be able to continue to collect accounts receivables and will not incur substantial bad debts as a result of the failure of customers to pay.

The Company may need to raise additional capital within the next twelve months through the sale of debt or equity securities to fund future operations, develop new and enhance existing products and services, or acquire complementary products, businesses or technologies. At this time, the Company is in the process of seeking additional capital. However, additional capital might not be available on terms favorable to the Company, or at all.

At this time, management believes that the Company will be able to operate as a going concern through at least the next twelve months based upon the amount of its existing available capital, its current operating plan and management’s commitment to reduce operating expenses further if the Company does not achieve the revenues anticipated in its current operating plan.

2. Principles of Consolidation

The accompanying interim unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of significant intercompany transactions and balances. These consolidated financial statements reflect the use of the following significant accounting policies, as described below and elsewhere in the notes to the interim unaudited consolidated financial statements. These interim unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.

3. Reclassifications

Certain amounts in the prior period’s financial statements have been reclassified to conform to the current period’s presentation.

4. Cash, Cash Equivalents and Available for Sale Securities

Cash equivalents are carried at cost, which approximates fair market value, and have original maturities of less than 90 days. Cash equivalents include money market accounts and repurchase agreements with overnight maturities.

As part of the McRoberts litigation discussed in Note 9, the Company has placed approximately $2.8 million in an escrow account while the case is on appeal. This amount is included as restricted cash in the accompanying balance sheet at February 28, 2003 and November 30, 2002. Approximately $388,000 of the cash and cash equivalents was restricted under various letters of credit at February 28, 2003 and November 30, 2002. Subsequent to February 28, 2003, one of the letters of credit was amended in amount and duration which resulted in a reduction of restricted cash and cash equivalents by $173,000.

The Company accounts for securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under this standard, the Company is required to classify all investments in debt and equity securities into one or more of the following three categories: held-to-maturity, available-for-sale or trading. Available-for-sale securities are recorded at fair market value with unrealized gains and losses excluded from earnings and included as a component of stockholders’ equity. All of the Company’s securities are classified as available for sale.

Securities held as of February 28, 2003 and November 30, 2002 consists of the following (in thousands):

	Maturity	February 28, 2003		November 30, 2002
Investments available for sale:

Equity securities		$	44	$	44

Corporate Obligations	Less than 1 year	—		82

Total investments available for sale		$	44	$	126

Securities had a cost of $40 and $116, and a market value of $44 and $126 at February 28, 2003 and November 30, 2002, respectively.

5. Inventories

Inventories are stated at the lower of first-in, first-out (FIFO) cost or market and consist of the following (in thousands):

	February 28, 2003		November 30, 2002
Raw materials	$	612	$	846
Work-in-process	297		403
Finished goods	1,044		1,198
	$	1,953	$	2,447

Work-in-process and finished goods inventories include material, labor and manufacturing overhead. Management performs periodic reviews of inventory and disposes of items not required by their manufacturing plan. Our reserve for excess and obsolete inventory is primarily based upon forecasted demand for our products. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

6. Property and Equipment, net

Property and equipment, net, at February 28, 2003 and November 30, 2002 is stated at cost, less accumulated depreciation and amortization, and consists of the following (in thousands):

	February 28, 2003			November 30, 2002
Machinery and equipment	$	4,568		$	4,445
Purchased software	1,677			1,677
Furniture and fixtures	60			59
Leasehold improvements	681			653
	$	6,986		$	6,834
Less accumulated depreciation and amortization	(5,299		)	(4,964		)
	$	1,687		$	1,870

In connection with the signing of the lease amendment for the Company’s principal facility in January 2002, the Company revised the estimated useful life of leasehold improvements and certain furniture and fixtures that would not be moved to the new facility. The charge has been reflected as accelerated depreciation and amortization of fixed assets in the accompanying Consolidated Statements of Operations for the three months ended February 28, 2002. Amounts classified as leasehold improvements are additions related to the Company’s new principal facility.

7. Intangible Assets

Intangible assets, net at February 28, 2003 and November 30, 2002 consist of the following (in thousands):

	February 28, 2003			November 30, 2002
Patents and Trademarks	$	566		$	548
Less accumulated amortization	(431		)	(403		)
	$	135		$	145

Patents and trademarks are being amortized over three years.

During the first quarter ended February 28, 2002, the Company settled litigation brought against it by the former shareholders of Wired, Inc. (“Wired”), a Company acquired by the Company in December 1999 (See Note 9 Contingencies). As part of the settlement, the Company assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. Wired agreed that no further action will be taken related to the lawsuit previously filed against the Company as noted in Note 9 Contingencies. Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property; provided, however, the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, Wired agreed to pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement included in the Consolidated Statements of Operations for the three months ended February 28, 2002 represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, and legal fees associated with the settlement.

8. Net Loss Per Common Share

The Company computes earnings per share pursuant to SFAS No. 128, Earnings Per Share. In accordance with SFAS No. 128, basic net income (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted income per share is computed using the weighted-average number of common shares outstanding and potential common shares from the assumed exercise of stock options and warrants outstanding during the period, if any, using the treasury stock method.

The Company excludes potentially dilutive securities from its diluted net income (loss) per share computation when either the exercise price of the securities exceeds the fair value of the Company’s common stock or when the Company reports a net loss and the effect of including such securities would be antidilutive. Options to purchase approximately 3,029,000 and 3,373,000 weighted average shares of common stock have been excluded from the computation of diluted average shares outstanding at February 28, 2003 and February 28, 2002, respectively, as the effect of their inclusion would have been antidilutive.

9. Contingencies

The Company provides accruals for all direct costs associated with the estimated resolution of known contingencies. The accrual is established at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated.

On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. (“Avid”) in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company’s Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company is vigorously defending this lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office.

On August 16, 2000, the U.S. Patent and Trademark Office issued an Office Action rejecting all of the claims made by Avid in their latest request for reexamination of the patent related to the aforementioned lawsuit. In addition, the Examiner at the U.S. Patent and Trademark Office designated the action as “final”. Avid filed a Notice of Appeal of the Examiner’s rejections to the U.S. Patent and Trademark Office Board of Patent Appeals and Interferences. On February 20, 2003, oral argument regarding the reexamination of Avid’s U.S. Patent No. 5,045,940 occurred and on March 21, 2003 a decision was rendered rejecting all of Avid’s claims and sustaining the Examiner’s rejection of all claims made on appeal. The litigation remains dismissed pending the outcome of the consolidated reissue/reexamination proceedings, and there can be no assurance that the Company will prevail in the appeal by Avid or that the expense or other effects of the appeal, whether or not the Company prevails, will not have a material adverse effect on the Company’s business, operating results and financial condition.

On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. (“MSI”) in the United States District Court for the Southern District of Indiana. The complaint alleges copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for unspecified monetary damages and enhanced damages, interest, costs and fees. An unfavorable verdict was filed on February 25, 2002 against the Company in the amount of $2.5 million. The Company and MSI filed post-trial motions. Those motions were ruled upon with the trial court reducing the total amount awarded by the jury but assessing prejudgment interest and attorney’s fees. The Company appealed the entire judgment, which approximates $2.8 million, and a hearing before the United States Court of Appeals for the Seventh Circuit occurred on December 12, 2002. The appeal remains outstanding and the Company is awaiting the verdict. The entire amount of the award has been placed in an escrow account pending judgment from the appellate court and approximately $2.8 million is included as restricted cash in the accompanying balance sheet at November 20, 2002.

The Company had recorded a liability in the amount of $2.6 million that included estimated legal fees associated with the litigation at November 30, 2001 and the entire amount was expensed in the three months ended November 30, 2001. During the year ended November 30, 2002, the Company recorded an additional liability and expense of $397,000 for the adjusted judgment which included prejudgment interest and attorney’s fees as well as estimated legal fees associated with the appeal.

During the year ended November 30, 2002, the Company settled litigation with the former shareholders of Wired, which was acquired by the Company in fiscal 2000. As part of the settlement, the Company assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. In return, Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property. In addition, Wired promised to pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement included in the Consolidated Statements of Operations for the three months ended February 28, 2002 represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, and legal fees associated with the settlement.

From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company’s business, operating results or financial condition.

Under the terms of the Company’s standard product license and sale contracts, the Company indemnifies its customers for the potential liability associated with the infringement of other parties’ technology based upon the Company’s products. There is a possibility that the Company may be liable to one of its customers in the event that there is infringement occurring. The Company is not aware of any infringement related to the Company’s technology, and therefore has not accrued any amounts for the replacement or refund of any software products sold through February 28, 2003.

10. Income Taxes

The Company recorded an income tax benefit of $102,000 during the three months ended February 28, 2002 as the Company received a refund from the U.S. Government related to a prior period payment.

11. Accrued Expenses

Accrued expenses at February 28, 2003 and November 30, 2002 consist of the following (in thousands):

	February 28, 2003		November 30, 2002
Payroll, payroll taxes and other taxes	$	886	$	838
Accrued warranty	525		525
Accrued restructuring	—		14
Accrued inventory	288		241
Accrued legal	3,039		3,015
Accrued selling and marketing	222		205
Accrued other	806		750
	$	5,766	$	5,588

12. Comprehensive loss

The Company records items of comprehensive income or loss in accordance with SFAS No.130, Reporting Comprehensive Income, and presents such information in the statement of stockholders’ equity. The components of accumulated other comprehensive loss are as follows (in thousands):

	Three months ended
	February 28, 2003			February 28, 2002
Net loss	$	(1,352	)	$	(5,863	)
Cumulative translation adjustment	(27		)	30
Unrealized holding gain (loss) on Available-for-sale securities	(7		)	—
Total comprehensive loss	$	(1,386	)	$	(5,833	)

13. Segment Information

The Company applies the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for public companies to report operating segment information in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision-making group is composed of the Chief Executive Officer and members of senior management. The Company’s reportable operating segments are digital video systems and services.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Revenues are attributed to geographic areas based on where the customer is located. Segment information for the quarters ended February 28, 2003 and February 28, 2002 is as follows:

	Digital Video Systems		Services		Corporate		Total
*February 28, 2003*
Net sales from external customers	$	3,557	$	1,240	$	—	$	4,797

Gross profit	1,318		1,017		—		2,335

Depreciation and amortization	354		9		—		363

Interest income, net	—		—		24		24

Net sales from external customers	$	2,852	$	1,646	$	—	$	4,498

Gross profit	669		1,343		—		2,012

Depreciation and amortization	1,440		15		—		1,455

Interest income, net	$	—	—		78		78

Interest income is considered a corporate level activity and is, therefore, not allocated to segments. Management believes transfers between geographic areas are accounted for on an arms length basis.

Net sales by geographic area for the quarters ended February 28, 2003 and 2002 were as follows (in thousands):

	February 28, 2003		February 28, 2002
North America	$	2,618	$	2,779
United Kingdom, Sweden, Denmark and Norway	791		473
France, Spain and Benelux	476		237
Germany, Austria and Switzerland	279		188
Asia, Japan and other foreign countries	633		821

	$	4,797	$	4,498

Long-lived tangible assets by geographic area for the quarters ended February 28, 2003 and November 30, 2002 consist of the following (in thousands):

	February 28, 2003		November 30, 2002

United States	$	1,581	$	1,741
United Kingdom	51		63
Germany	19		19
France	36		47

	$	1,687	$	1,870

14. New Accounting Standards

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement goodwill as well as certain other intangible assets, determined to have an indefinite life, will no longer be amortized. These assets will be reviewed for impairment on a periodic basis. This statement is effective for the Company in the first quarter of fiscal year 2003. The adoption of this standard did not have a material impact on the Company’s financial statements.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligation of lessees. This statement amends FASB Statement No. 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this standard did not have a material impact on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supercedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” SFAS 144 further refines the requirements of SFAS No. 121 that companies (1) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable based on its undiscounted future cash flows and (2) measure an impairment loss as the difference between the carrying amount and fair value of the asset. In addition, SFAS No. 144 provides guidance on accounting and disclosure issues surrounding long-lived assets to be disposed of by sale. This statement is effective for the Company in the first quarter of fiscal year 2003. The adoption of this standard did not have a material impact on the Company’s financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the accounting for costs associated with restructuring activities and other disposal activities. This statement supersedes EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity. This statement will be effective for disposal activities initiated after December 31, 2002, and the Company will adopt this statement for any costs relating to restructuring or disposal activities initiated after the effective date.

On December 31, 2002, SFAS No. 148, "Accounting for Stock-Based Compensation – Transition and Disclosure" was issued. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for their employee stock-based awards using the fair value method. However, the disclosure provisions are required for all companies with stock-based employee compensation, regardless of whether they utilize the fair method of accounting described in SFAS No. 123 or the intrinsic value method described in APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 148’s amendment of the transition and annual disclosure provisions of SFAS No. 123 are effective for fiscal years ending after December 15, 2002. The Company has adopted the annual disclosure provisions of SFAS No. 123. The Company does not believe that the adoption of this standard will have a material impact on the Company’s financial statements.

In November 2002, the FASB issued Interpretation No. (FIN) 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (the Interpretation). The Interpretation will significantly change current practice in the accounting for, and disclosure of, guarantees. The Interpretation requires certain guarantees to be recorded at fair value, which is different from current practice, which is generally to record a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB SFAS No. 5, "Accounting for Contingencies." The Interpretation also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote, which is another change from current practice. The Interpretation applies to public and non-public entities, and its disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of the interpretation does not have a material impact on its financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited consolidated financial statements and the related notes appearing elsewhere in this report. The discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The preparation of these requires management to make estimates and judgements that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including those related to product returns, bad debts, inventories, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Statements” and elsewhere in this report.

We design and sell advanced media systems for content design. In the case of our newest and most advanced development, 844/X™, we have integrated the previously separate workflows of real-time video editing and the compositing of layers of video, computer graphics, audio, and metadata. We believe this workflow integration is a technical breakthrough that over time will attract existing and new video editing users who wish to be able to design more complex content that comprises dozens, even hundreds of distinct content layers. Our Company has developed new technology—integrated software and hardware, including Application-Specific Integrated Circuits (“ASICs”)—to perform compositing in real time or at high speed to allow compositing operations to be performed within an editing environment and execute at high speed without host-based rendering, which is slow and impedes productivity.

Our products are personal computer-based workstations configured with proprietary software and hardware that we engineer and manufacture. In some cases, particularly with 844/X, we sell our products as fully integrated systems, meaning we configure and ship the system to an end user, or reseller, with a host personal computer, our software and hardware, and optional disk storage; in other cases, we deliver only our software and hardware (“unbundled”), typically to an independent value-added reseller that configures the turnkey system themselves on behalf of an end user.

Critical Accounting Policies and Estimates

This management’s discussions and analysis of financial condition and results of operations discuss our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgements, including those related to revenue recognition, inventories, the impairment of long lived assets, legal contingencies and discontinued operations. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies most significantly affect the portrayal of our financial condition and require management’s most difficult and subjective judgements.

Revenue Recognition

We recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognition as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with respect to Certain Transactions. Net sales are recognized following establishment of persuasive evidence of an arrangement, provided that the license fee is fixed or determinable, delivery of product has occurred via physical shipment or electronically, a determination has been made by management that collection is probable and the Company has no remaining obligations. Revenues under multiple element arrangements, which typically include products and maintenance sold together, are allocated to each element using the residual method in accordance with SOP 98-9. The Company provides for estimated returns at the time of shipment. The Company recognizes maintenance revenue from the sale of post-contract support services ratably over the life of the contract. We maintain allowances for estimated losses resulting from the inability of our customers to make required payments, however, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, allowances would be required.

Inventories

Our reserve for excess and obsolete inventory is primarily based upon forecasted demand for our products and any change to the reserve arising from forecast revisions is reflected in cost of sales in the period the revision is made. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Long-lived Assets

Property and equipment, including leasehold improvements, are depreciated over their useful lives. Useful lives are based on management’s estimates of the period that the Company will realize the benefit of these assets.

Legal Contingencies

We are currently involved in legal proceedings. As discussed in Note 9 of the consolidated financial statements, as of February 28, 2003, we have provided accruals for all direct costs associated with the estimated resolution of known contingencies. The accrual is established at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. This litigation could take several years to complete. Accordingly, actual legal fees and, possibly, damages awards or settlements, could differ significantly from our estimates. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions, or the effectiveness of our strategies, related to these proceedings.

Results of Operations

The following table shows certain consolidated statements of operations data as a percentage of net sales.

	Three months ended
	February 28, 2003		February 28, 2002
Net sales:
Products	74.2	%	63.4	%
Services	25.8		36.6
Total net sales	100.0		100.0
Cost of sales	51.3		49.8
Accelerated depreciation and amortization of fixed assets	—		5.5
Gross profit	48.7		44.7
Operating expenses:
Research and development	37.0		57.1
Selling and marketing	30.5		50.0
General and administrative	13.4		24.6
Amortization and write-off of intangible assets	—		10.9
Accelerated depreciation and amortization Of fixed assets	—		14.1
Settlement of litigation	—		20.5
Total operating expenses	80.9		177.2
Operating loss	(32.2	)	(132.5	)
Interest income, net	0.5		1.7
Other income (expense), net	3.5		(1.9	)
Loss from operations before benefit from income taxes	(28.2	)	(132.6	)
Benefit from income taxes	—		(2.3	)
Net loss	(28.2	)%	(130.3	)%

Comparison of First Fiscal Quarter of 2003 to First Fiscal Quarter of 2002

Net sales. We derive our sales from the licensing and sale of our software for advanced media systems for content design, and from services in the form of annual contracts supporting our software and systems. In the case of software and systems, we recognize revenue upon shipment or distribution over the Internet to a customer provided there exists persuasive evidence of an arrangement, the license fee is fixed or determinable, a determination has been made by management that the collection is probable and the Company has no remaining obligations. In the case of services that support our software and systems products, called Platinum Services, we recognize revenue ratably over the life of the service contract.

Our total net sales for the first quarter of fiscal 2003 increased 6.6% to $4.8 million from $4.5 million for the first quarter of fiscal 2002. Net sales from products for the first quarter of fiscal 2003 increased 24.7% to $3.6 million from $2.9 million for the first quarter of fiscal 2002. The increase in net sales from products is due to sales of 844/X (increase of $1.9 million), which began shipping in the second quarter of fiscal 2002. This increase was partially offset by a decrease in sales of our digital video editing systems (decrease of $800,000) due to increased competition resulting in lower unit sales and average selling prices and the elimination of sales of the MPEG-based products acquired in the acquisition of Wired, Inc. (“Wired”) (decrease of $400,000). We recognized approximately $1.3 million of previously deferred 844/X revenue during the first quarter of fiscal 2003 due to the delivery of an upgrade, which we announced in the fourth quarter of fiscal 2002 and shipped in the first quarter of fiscal 2003. Upon shipment of the upgrade we recognized all revenue previously deferred that was associated with the upgrade. During the first quarter of fiscal 2003, we deferred approximately $900,000 of 844/X revenue shipped in the first quarter of fiscal 2003 due to the undelivered version 2.0 upgrade, which we announced in the first quarter of fiscal 2003 and expect to ship in the second quarter of fiscal 2003. Upon shipment of the upgrade we expect to recognize previously deferred revenue that is associated with the upgrade. We anticipate the trend of lower year-over-year sales of our digital video systems to continue in fiscal 2003, offset by sales from 844/X. Net sales from services for the first quarter of fiscal 2003 decreased 24.7% to $1.2 million from $1.6 million for the first quarter of fiscal 2002. The decrease in net sales from services is the result of lower sales of service contracts due to lower unit sales of our digital video editing systems and lower renewal rates of these service contracts from our installed base.

Net sales from customers outside of North America accounted for approximately 45.4% and 38.2% of net sales in the first quarter of fiscal 2003 and the first quarter of fiscal 2002, respectively. With the introduction of 844/X in April 2002, we are continuing to develop our indirect distribution channels in North America, Europe, Asia and Latin America and currently anticipate that customers outside North America will continue to account for a substantial portion of our net sales, and as a percentage of net sales, to range between 35% and 45% during the remainder of fiscal 2003.

Cost of sales. Cost of sales for products consists of the cost of manufacturing PCI hardware boards for our advanced media systems for content design and our digital video editing systems and royalties paid to third parties for their software that has been integrated into our systems. Cost of sales also includes the cost of manuals and other product documentation, related labor and, in the case of 844/X, may include third-party components such as disk drives, personal computers and other third-party hardware components. Cost of sales for our service offerings consists of salaries and related expenses for service personnel delivering the service to the customer.

Total cost of sales decreased 1.0% to $2.5 million in the first quarter of fiscal 2003 from $2.5 million in the first quarter of fiscal 2002. The slight decrease in cost of sales is related to lower unit sales of our digital video editing systems and the elimination of an expense for accelerated depreciation, offset by increased cost of sales due to higher sales of 844/X.

Gross profit. Our gross profit increased 16.1% to $2.3 million in the first quarter of fiscal 2003 from $2.0 million in the first quarter of fiscal 2002. Overall gross profit as a percentage of net sales increased to 48.7% in the first quarter of fiscal 2003 from 44.7% in the first quarter of fiscal 2002. Gross profit as a percentage of net sales of products increased to 37.1% in the first quarter of fiscal 2003 from 23.5% in the first quarter of fiscal 2002, while gross profit as a percentage of net sales of services increased to 82.0% in the first of fiscal 2003 from 81.7% in the first quarter of fiscal 2002. The increase in gross profit for products in the first quarter of fiscal 2003 over the first quarter of fiscal 2002 was the result of the elimination of an expense for accelerated depreciation of leasehold improvements and other fixed assets located in our former facility and not moved to our new facility. During the remainder of fiscal 2003, we currently anticipate that gross margins will improve slightly from current levels.

Research and development. Research and development expenses include costs incurred to develop and improve our existing intellectual property and develop new intellectual property and are charged to expense as incurred. To date, development costs for our systems have been charged to expense as incurred because the costs incurred from the attainment of technological feasibility to general product release have not been significant. Our research and development costs may fluctuate from quarter to quarter due to the nature of the products under development. Some of our systems have PCI hardware included in the product and the costs associated with designing and developing this type of hardware can be expensive. In addition, our software developers require this hardware in order to integrate the software code they develop with the hardware to create a fully integrated advanced media system for content design.

Research and development expenses decreased 30.9% to $1.8 million in the first quarter of fiscal 2003 from $2.6 million in the first quarter of fiscal 2002. The majority of the decrease in research and development expenses represented lower development costs associated with 844/X, which shipped in April 2002. We currently anticipate our research and development expenses will decrease in absolute dollars in fiscal 2003 versus fiscal 2002 because we believe that ongoing maintenance costs and the cost of improvements to 844/X will not be as high in fiscal 2003 as the development costs to create the first version of the product.

Selling and marketing. Selling and marketing expenses consist primarily of salaries and related benefits, travel, commissions and marketing costs such as advertising, trade shows, marketing materials, lead generation activities and public relations. Our selling and marketing expenses may fluctuate from quarter to quarter based on the timing of trade shows and sales commissions, which vary based on sales.

Selling and marketing expenses decreased 34.8% to $1.5 million in the first quarter of fiscal 2003 from $2.2 million in the first quarter of fiscal 2002. In the first quarter of fiscal 2002, we were preparing for the introduction of 844/X and incurred significant marketing expenses in connection with these activities. These product launch activities and the expenses associated with them, occurred in the first and second quarters of fiscal 2002. In the first quarter of fiscal 2003 there were no product launch activities still ongoing and the marketing expenses incurred in the period were in support of ongoing promotion and sales of 844/X, which are considerably less than the initial product launch expenses. We currently anticipate that our selling and marketing expenses will decrease in absolute dollars in fiscal 2003 versus fiscal 2002 as we execute our strategy of leveraging the indirect channel of resellers we developed in fiscal 2002 to sell 844/X. Also, in the first half of fiscal 2002, we incurred significant marketing expenses related to the introduction of 844/X and, while we plan to continue aggressively marketing 844/X, we believe our marketing costs in fiscal 2003 will be less than fiscal 2002.

General and administrative. General and administrative expenses consist primarily of salaries and related benefits, travel and outside services for human resources, finance, information technology, legal, and other administrative functions. General and administrative expenses decreased 41.7% to $645,000 in the first quarter of fiscal 2003 from $1.1 million in the first quarter of fiscal 2002. The decrease in general and administrative expenses resulted primarily from lower expenses in the following categories: employee-related; legal fees; bad debts; occupancy; and outside services. We currently anticipate that our general and administrative expenses will decrease in fiscal 2003 compared to fiscal 2002 as we align our expense structure with anticipated revenue levels.

Amortization of intangible assets. We recorded amortization expense of $492,000 in the first quarter of fiscal 2002 related to the acquisitions of Wired, Inc. and certain assets of Integrated Computing Engines, Inc. During fiscal 2002, we expensed all remaining goodwill related to these acquisitions and, therefore, there was no amortization expense in the first quarter of fiscal 2003.

Accelerated depreciation and amortization of fixed assets. We recorded a charge of $634,000 in the first quarter of fiscal 2002 related primarily to leasehold improvements at our previous facility in Marlborough, Massachusetts. During the second quarter of fiscal 2002 we completed our relocation from this facility to a new facility, also located in Marlborough, Massachusetts, better suited to meet our needs. As a result of this decision and the signing of a lease for the new facility we amortized the remaining book value as of the beginning of fiscal 2002 of all leasehold improvements, furniture and fixtures over the remaining months in fiscal 2002 (four) that we occupied our previous facility and, therefore, there was no such charge in the first quarter of fiscal 2003.

Settlement of litigation. We agreed to settle litigation brought against us by the former shareholders of Wired, Inc., a company we acquired in December 1999. As part of the settlement, we assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. Wired granted us an irrevocable license to use the source code, technology, know how and intellectual property; provided, however, the license does not include the right to sell Wired products or any equivalent products incorporating the source code, technology, know how and intellectual property. In addition, we agreed to provide limited manufacturing and marketing support to the former shareholders. In exchange for all these items, we will receive a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. This agreement resulted in a write-off of the remaining goodwill created through the acquisition of Wired. There was no similar expense recorded in the first quarter of fiscal 2003. Litigation settlement of $924,000, included in the Consolidated Statements of Operations for the first quarter of fiscal year 2002, represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, legal fees associated with the settlement, less a reimbursement related to the litigation from the Company’s insurance carrier.

Interest income, net. Interest income, net, decreased 69.2% to $24,000 in the first quarter of fiscal 2003 from $78,000 in the first quarter of fiscal 2002. The decrease in interest income, net, resulted from lower cash and cash equivalents due primarily to the net loss incurred in fiscal 2002 and the first quarter of fiscal 2003. We currently anticipate that interest income will decline in fiscal 2003 versus 2002 due to lower cash levels.

Other income (expense), net. Other income, net was $172,000 for the first quarter of fiscal 2003 compared to other expense, net of $84,000 for the first quarter of fiscal 2002. In the first quarter of fiscal 2003, other income, net primarily consisted of foreign exchange gains on intercompany transactions with our foreign subsidiaries and for the first quarter of fiscal 2002 other expense, net primarily consisted of foreign exchange losses on intercompany transactions with our foreign subsidiaries. Gains and losses on our intercompany transactions with our foreign subsidiaries are impacted by changes in the value of the U.S. dollar relative to certain European currencies.

Tax benefit. We recorded a benefit from income taxes of $102,000 in the first quarter of fiscal 2002 due to an income tax refund we received. We did not record a tax provision or benefit in the first quarter of fiscal 2003.

Net loss. As a result of the above factors, we recorded a net loss in the fist quarter of fiscal 2003 in the amount of ($1.4) million, or ($0.10) per share, compared to a net loss of ($5.9) million, or ($0.46) per share, in the first quarter of fiscal 2002.

Liquidity and Capital Resources

As of February 28, 2003, our principal sources of liquidity included cash, cash equivalents and marketable securities totaling approximately $3.4 million. This was a decrease of approximately $1.3 million of cash, cash equivalents and marketable securities since the end of our previous fiscal year, which ended November 30, 2002. In addition, we have approximately $2.8 million in an escrow account while the McRoberts litigation is under appeal. This amount is classified as restricted cash in the February 28, 2003 Consolidated Balance Sheets. Additionally, the Company has restricted cash of approximately $390,000 relating to several letters of credit.

During the first quarter of fiscal 2003, cash used in operating activities was approximately $1.2 million compared to cash used in operating activities of approximately $4.2 million for the first quarter of fiscal 2002. Cash used in operations during the first quarter of fiscal 2003 included a net loss of $1.4 million including depreciation and amortization of $363,000 and was affected by changes in assets and liabilities including decreases in deferred revenue of $594,000, accounts payable of $299,000, prepaid expenses and other current assets of $265,000 and restricted cash of $7,000. These uses of cash were offset by decreases in inventories of $494,000 and accounts receivable of $300,000 and an increase in accrued expenses of $178,000. The Company ended the first quarter of fiscal 2003 with days sales outstanding (DSO) of 41. At the end of fiscal 2002, DSOs were 84 due to the deferral of 844/X revenue from the fourth quarter of fiscal 2002 to the first quarter of fiscal 2003. Net cash used in investing activities was $88,000 for the first quarter of fiscal 2003 compared to $314,000 for the first quarter of fiscal 2002. Cash used in investing activities for the first quarter of fiscal 2003 was primarily for purchases of capital equipment of $152,000 and purchases of intangible assets of $18,000, partially offset by net proceeds from sales of marketable securities of $82,000. Net cash provided by financing activities during the first quarter of fiscal 2003 was $75,000 compared to $272,000 for the first quarter of fiscal 2002. In the first quarter of fiscal 2003, cash provided by financing activities came from proceeds from the issuance of common stock pursuant to stock plans of $75,000.

At February 28, 2003, our contractual cash obligations were as follows:

	Total		Less than 1 year		1–3 years
Lease commitments	$	1,376,000	$	654,000	$	722,000
Inventory commitments	$	377,000	$	377,000	$	—

In addition to the above contractual obligations, the Company has other contractual obligations. The Company has entered into indemnification agreements with the non-employee members of the Board of Directors. Additionally, the Company has from time to time entered into employment and executive retention agreements with certain employees and executive officers, which, among other things, include certain severance and change of control provisions. Under the terms of the Company’s standard product license and sale contracts, the Company indemnifies its customers for the potential liability associated with the infringement of other parties’ technology based upon the Company’s products. There is a possibility that the Company may be liable to one of its customers in the event that there is infringement occurring. The Company is not aware of any infringement related to the Company’s technology, and therefore has not accrued any amounts for the replacement or refund of any software products sold through February 28, 2003.

We have already taken a series of actions to reduce the negative cash flow we experienced in the past fiscal year including the termination of employees, reductions in the salaries paid to executives and certain other employees, relocation of our facility to lower cost office space and a reduction in the marketing expenses for existing products. However, these expense reductions will not be enough to return us to profitability without revenue growth. Our current operating plan and cash flow projections assume a certain level of revenue growth and operating expenses. If we fail to achieve our revenue plan then we will realign our operating

expenses consistent with the revised revenue expectations at that time in order to conserve cash. Our current cash flow projections also assume we will not require substantial cash for capital purchases or to fund substantial increases in inventory, accounts receivable or other assets and the projections assume we will be able to continue to collect our accounts receivables and will not incur substantial bad debts as a result of the failure of our customers to pay us.

We may need to raise additional capital within the next twelve months through the sale of debt or equity securities to fund future operations, develop new and enhance existing products and services, or acquire complementary products, businesses or technologies. At this time, we are in the process of seeking additional capital. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders may be reduced, our stockholders may experience additional dilution, and such securities may have rights, preferences or privileges senior to those of our existing stockholders (see Cautionary Statements for additional details). Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms our ability to fund existing operations and expansion, take advantage of unanticipated opportunities or develop or enhance our products or services would be significantly limited and we may need to revise our operating plan to reduce operating expenses further. At this time, we believe that we will be able to operate our business as a going concern for at least the next twelve months based upon the amount of our existing available capital, our current operating plan and our commitment to reduce operating expenses further if we do not achieve the revenues anticipated in our current operating plan.

Should we require additional capital to fund our operations and are unsuccessful in our efforts to raise sufficient capital, we will examine our alternatives, including the sale or liquidation of part or all of our business.

Cautionary Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following cautionary statements and elsewhere in this Quarterly Report on Form 10-Q. If any of the following risks were to occur, our business, financial condition, or results of operations would likely suffer. In that event, the trading price of our common stock would decline.

History of Losses and Negative Cash Flows, Expect to Incur Losses in the Future and May Not Achieve or Maintain Profitability. We have incurred substantial operating losses during the past fiscal year and in four of the past five fiscal years, have experienced negative cash flow from ongoing operations in the last fiscal year ended November 30, 2002, and we expect to incur operating losses and negative cash flows for at least the first half of fiscal 2003. We incurred a loss from continuing operations of approximately $1.4 million for the first quarter of fiscal 2003 ended February 28, 2003 and as of February 28, 2003, we had an accumulated deficit of approximately $215.7 million.

Over the past four years we have significantly increased our research and development expenses as a percentage of total sales and we plan to continue to invest in new technology, and as a result, we may incur operating losses in future periods. We will need to generate increases in our current sales levels to achieve and maintain profitability and we may not be able to do so. Our current operating plan and cash flow projections assume a certain level of revenue growth and operating expenses. If we fail to achieve our revenue plan then we will realign our operating expenses consistent with the revised revenue expectations at that time in order to conserve cash. If our sales grow more slowly than we anticipate or if our operating expenses increase more than we expect or cannot be reduced in the event of lower revenue, our business will be significantly and adversely affected. Although we implemented a restructuring program in July 2002 to better align our operations and cost structure with current and anticipated market conditions, this program will not be sufficient for us to achieve profitability in any future period without revenue growth. Even if we achieve profitability in the future on a quarterly or annual basis, we may not be able to sustain or increase profitability. Our failure to achieve profitability, achieve the level of profitability, or sustain the level of profitability expected by investors and securities analysts may adversely affect the market price of our common stock.

In addition, we expect that we will continue to experience negative operating cash flows for at least the first half of fiscal 2003. Depending on future cash flow, we may need to raise additional capital in the future to meet our cash requirements and we may not be able to find additional financing, if required, on favorable terms or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund existing operations and expansion, take advantage of unanticipated opportunities or develop or enhance our products or services would be significantly limited and we may need to revise our operating plan to reduce operating expenses further.

If We Are Unable to Obtain Additional Capital as Needed in the Future, Our Business May be Adversely Affected and the Market Price for Our Common Stock Could Decline Significantly. We have been unable to fund our operations using cash generated from our business operations and have financed our operations principally through the prior sales of securities and from existing

cash on our balance sheet. We may need to raise additional debt or equity capital to fund our existing operations, expand operations, maintain and enhance existing products and services or acquire or invest in complementary products, services, businesses or technologies. At this time, we are in the process of seeking additional capital. If we raise additional funds through further issuance of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity or debt securities we issue may have rights, preferences, or privileges superior to those of holders of our common stock. If we do raise capital through the issuance of equity or convertible debt the amount of dilution will depend upon several factors including, but not necessarily limited to, the amount of capital raised, the security or securities issued, the terms of the security and the market price of the company’s common stock. Additionally, the terms of the equity or debt securities we may issue to the investor(s) may have rights, preferences or privileges superior to those of holders of our common stock including, but not limited to, liquidation preferences, anti-dilution provisions, dividends, voting rights, protective provisions, right of first refusal on certain future financing transactions and consent provisions for certain transactions. The effect of some of these new terms may be to provide what is perceived as a disproportionate return to the new investor. For example, a new investor might obtain an equity stake based on current market values, but with the right to some multiple of the investment being required to be returned to the new investor before any return is made to existing shareholders. Even after offering these terms we may not be able to obtain additional financing. If adequate funds are not available to us on terms favorable to us, our business may be adversely affected and the market price for our common stock could decline significantly. If adequate funds are not available or are not available on acceptable terms, our ability to fund existing operations and expansion, take advantage of unanticipated opportunities or develop or enhance our products or services would be significantly limited and we may need to revise our operating plan to reduce operating expenses further. At this time we believe that we will be able to continue to operate our business as a going concern for at least the next twelve months based upon the amount of our existing capital, our current operating plan and our commitment to reduce operating expenses further if we do not achieve the revenues anticipated in our current operating plan. However, we offer no assurances in this regard

Significant Fluctuations and Unpredictability of Operating Results. Our quarterly operating results are difficult to predict, have varied significantly in the past and are likely to vary significantly in the future for a number of reasons, including new product announcements and introductions by ourselves or our competitors, changes in pricing, and the volume and timing of orders received during the quarter. Also, in the past, we have experienced delays in the development of new products and enhancements, and such delays may occur in the future. These factors make the forecasting of revenue inherently uncertain. Additionally, a significant portion of our operating expenses is relatively fixed, and operating expense levels are based primarily on internal expectations of future revenue. As a consequence, quarterly operating expense levels cannot be reduced rapidly in the event that quarterly revenue levels fail to meet internal expectations. For these reasons, you should not rely on period-to-period comparisons of our financial results to forecast our future performance. It is likely that in some future quarter or quarters our operating results will be below the expectations of securities analysts or investors. In addition, we typically realize a significant percentage of our sales for a fiscal quarter in the second half of the third month of the quarter. As a result, our quarterly results may be difficult or impossible to predict. If quarterly revenue or earnings levels fail to meet internal or external expectations, the market price of our common stock may decline significantly.

Dependence on Key Personnel. We believe that our future success will depend on our continued ability to attract and retain qualified employees, especially in research and development. Our inability to attract and retain qualified personnel on a timely basis, or the departure of key employees could have a material adverse affect on our business and operating results and negatively affect the price of our common stock. In addition, if we are unable to maintain existing sales levels or achieve internal sales projections we may implement an employee reduction program, which may result in the termination of key personnel necessary to maintain certain functions or operations for the Company. The loss of key personnel will have a negative effect on our future results and reduce our ability to achieve projected sales levels and profitability.

Possibility of NASDAQ Delisting. By letter dates March 3, 2003, we received notification from the Listing Qualifications Department of The NASDAQ Stock Market, Inc., indicating that our stockholders' equity does not satisfy the minimum requirement for continued listing in The NASDAQ National Market as set forth in Marketplace Rule 4450(a)(3) and that, due to this deficiency, Nasdaq has communicated to us their intention to de-list us from The NASDAQ National Market. In addition, by letter dated March 6, 2003, we received notification from the Listing Qualifications Department of The NASDAQ Stock Market, Inc., indicating that our common stock had not maintained the required minimum bid price for continued quotation on The NASDAQ National Market and is therefore subject to delisting. NASD Rule 4450(a)(5) requires that, for continued quotation on The NASDAQ National Market, a company must maintain1 a minimum bid price of $1.00 for at least one day during any period of thirty consecutive business days. NASDAQ rules provide that a listed company is given a period of ninety calendar days to achieve compliance with the minimum bid requirement in order to maintain its listing on The NASDAQ National Market. During the ninety day period, a company would be considered to be in compliance with NASDAQ's minimum bid price requirements if its minimum bid is $1 or greater for any ten consecutive business days. In response, we have voluntarily submitted an application for listing on The NASDAQ Small Cap Market and await a decision from NASDAQ. There can be no assurance that we will be able to take actions sufficient to achieve or maintain compliance with the continued listing criteria of The NASDAQ Small Cap Market or The NASDAQ National Market, the price and liquidity of our common stock could be adversely affected, our ability to access the capital markers would likely be more limited, and it may adversely affect our ability to generate new sales of our software product and may cause existing customers and vendors to question our viability. Additionally, our stock may be subject to "penny stock" regulations.

Weak Worldwide Economic Conditions and Advertising Market May Result in Decreased Sales and Continued Operating Losses. Growth in sales and a return to profitability for our company depends on the overall demand for television advertising, which is driven by economic conditions in the markets in which we compete. A substantial portion of our sales is to companies providing their services for the creation of television advertisement and demand for our customers’ services is affected by general economic and business conditions. During the past two years, due to weak economic conditions, television advertisers have spent less money advertising their products and services and, as a result, demand for the services our customers provide has decreased. In this weak economic environment, we may not be able to effectively promote future growth or maintain existing sales levels or achieve the sales levels expected by investors and securities analysts in any given period, or achieve profitability and, as a result, our business and operating results could be materially and adversely affected and our stock price could decline.

Our Lengthy and Variable Sales Cycle Makes it Difficult for Us to Predict When or if Sales Will Occur and Therefore We May Experience an Unplanned Shortfall in our Anticipated Sales Levels. 844/X has a lengthy and unpredictable sales cycle that contributes to the uncertainty of our operating results. Our prospects view the purchase of 844/X as a significant and strategic decision for their company. As a result, prospects generally evaluate 844/X and determine its impact on existing infrastructure and workflow. The purchase of 844/X may be delayed if the prospect has lengthy internal budgeting, approval or evaluation processes. We may incur significant selling and marketing expenses during a prospect’s evaluation period before the customer places an order with us. Some prospects may purchase 844/X as part of multiple simultaneous purchasing decisions, which may result in unanticipated delay in receiving an order from the customer. If sales forecasted from specific customers are delayed to future quarters, we may experience an unplanned shortfall in sales, which could significantly and adversely affect our operating results and stock price.

Emerging Markets. The markets in which we offer our systems products and services are intensely competitive and rapidly changing. We are targeting the emerging market of broadcast designers, effects artists, and creative professionals. This market and the products utilized by these users are relatively new. Our success in this emerging market will depend on the rate at which the market develops and our ability to penetrate that market. We will not succeed if we cannot compete effectively in this market and, as a result, our business and operating results could be materially and adversely affected.

Risks Associated With Development and Introduction of New Products. If we are not successful in developing and introducing new products to the markets we serve our business and operating results will suffer. In April 2002, we began shipping 844/X, and currently anticipate this new product will generate greater than 50% of the revenue from product sales beginning in fiscal 2003. If the adoption of 844/X is slower than we anticipate or if there are delays in releasing subsequent versions of 844/X, our current revenue expectations may be too high and our operating results may be negatively affected. In addition, new product announcements by our competitors and other new product announcements by us could have the effect of reducing customer demand for our existing products. Also, when we introduce new or enhanced products we must effectively manage the transitions from existing products to minimize disruption of orders from our customers. New product introductions require us to devote time and resources to the training of our sales channel in the features and target customers for such new products, which efforts could result in less selling efforts being made by the sales channel during such training period. Our failure to effectively manage new product announcements or introductions could contribute to significant quarterly fluctuations in operating results as orders for new products commence and orders for existing products decline and, as a result, our operating results will suffer.

Dependence on and competition with Apple Computer, Inc. As a competitor, Apple Computer, Inc. (“Apple”) could, in the future, inhibit our ability to develop our products that operate on the Macintosh platform. Additionally, new products and enhancements to existing products from Apple such as Final Cut Pro could cause customers to delay purchases of our products or alter their purchase decision altogether. Furthermore, as the sole supplier of Macintosh computers, any disruption in the availability of these computers could cause customers to defer or alter their purchase of our products. We rely on access to key information from Apple to continue development of our products and any failure to continue supplying our engineers with this information could have a material adverse affect on our business and financial results and negatively affect the price of our common stock.

Dependence on Microsoft Corporation. Many of our products operate in the Windows environment and our engineers depend upon access to information in advance from Microsoft Corporation (“Microsoft”). Any failure to continue supplying our engineers with this information could have a material adverse affect on our business and financial results and negatively affect the price of our common stock.

Rapid Technological Change. Rapidly changing technology, evolving industry standards and frequent new product introductions characterize the market for our products. Our future success will depend in part upon our ability to enhance existing products and

to introduce new products and features in a timely manner to address customer requirements, respond to competitive offerings, adapt to new emerging industry standards and take advantage of new enabling technologies that could render our existing products obsolete. We plan to continue to invest in research and development, in connection with our development strategy. Any delay or failure on our part in developing additional new products or features for existing products or any failure of such new products or features to achieve market acceptance, could have a material adverse effect on our business and operating results and our stock price will suffer.

Risks of Third-Party Claims of Infringement. There has been substantial industry litigation regarding patent, trademark and other intellectual property rights involving technology companies. In the future, litigation may be necessary to enforce any patents issued to us or to enforce trade secrets, trademarks and other intellectual property rights owned by us, to defend ourselves against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. For a description of certain pending litigation instituted against us, see Note 9 to the Interim Unaudited Consolidated Financial Statements included herein. Any such litigation could be costly and a diversion of management’s attention, which could adversely affect our business and operating results and our financial condition. Adverse determinations in any such litigation could result in the loss of our proprietary rights, subject us to significant liabilities, and require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could adversely affect our business and operating results and our financial condition.

Weak Economic Conditions May Cause our Customers to Experience Financial Difficulties and May Represent a Credit Risk. Due to the weak global economy and uncertainties relating to the prospects for near-term global economic growth, some of our customers may experience financial difficulties and may represent a credit risk to us. If these customers experience financial difficulties or fail to experience commercial success, we may have difficulty collecting our accounts receivable.

Competition. The market for our products is highly competitive and characterized by pressure to reduce prices, incorporate new features and accelerate the release of new products. A number of companies currently offer products that compete directly or indirectly with our products, including Accom, Inc., Adobe Systems Inc., Apple Computer, Inc., Avid Technology, Inc., Discreet (a division of Autodesk, Inc.), Leitch, Inc., Matrox Electronic Systems Ltd., Pinnacle Systems, Inc. and Quantel Ltd. In addition, we expect much larger vendors, such as Matsushita Electric Industrial Company Ltd., Microsoft Corporation, and Sony Corporation, to develop and introduce digital editing systems that may compete with our products. Many of these current and potential competitors have greater financial, technical and marketing resources than we have, including, without limitation, larger and more established selling and marketing capabilities, greater brand recognition and a larger installed base of customers, and well-established relationships with our existing and potential customers, complementary technology vendors and other business partners. As a result, our competitors may be able to develop products comparable to or superior to our own products, adapt more quickly than us to new technologies, evolving industry standards or customer requirements, or lower their product costs and thus be able to lower prices to levels at which we could not operate profitably, the occurrence of any of which could have a material adverse effect on our business and operating results. In this regard, we believe that we will continue to experience competitive pressure to reduce prices, particularly for our high performance systems. We have historically realized higher gross profit on the sale of these high performance systems, and such continued competitive pricing pressure could result in lower sales and gross margin, which in turn could adversely affect our business and operating results and negatively affect the price of our common stock.

Dependence on Propriety Technology. Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others. Previously, we have received, and may in the future continue to receive, communications suggesting that our products may infringe on the patents or other intellectual property rights of third parties. Our policy is to investigate the factual basis of such communications and negotiate licenses where appropriate. While it may be necessary or desirable in the future to obtain licenses relating to one or more products, or relating to current or future technologies, there can be no assurance that we will be able to do so on commercially reasonable terms or at all. There can be no assurance that these or other future communications can be settled on commercially reasonable terms or that they will not result in protracted and costly litigation. Any failure to secure the necessary intellectual property right of third parties on commercially reasonable terms may adversely affect our business and operating results and negatively affect the price of our common stock.

Dependence on Single or Limited Source Suppliers. We are dependent on single or limited source suppliers for several key components used in its products that have no ready substitutes, including various audio and video signal processing integrated circuits manufactured in each case only by Crystal Semiconductor® Corp., Fairchild Semiconductor® Corp., Gennum® Corporation, Toshiba, Kawasaki LSI USA® Inc., Philips® Semiconductors, Silicon Optix™, Faraday Technology, Scientific Conversion, Xilinx®, Altera®, Lattice®, Agere®, Marvel®, and IDT®. The availability of many of these components is dependent on our ability to provide suppliers with accurate forecasts of our future requirements, and certain components we use to build our products have been subject to industry-wide shortages and the continued viability of these suppliers and product line.

We do not carry significant inventories of these components and have no guaranteed supply arrangements with such suppliers. There can be no assurance that our inventory levels will be adequate to meet production needs during any interruption of supply. Our inability to develop alternative supply sources, if required, or a reduction or stoppage in supply, could delay product shipments until new sources of supply become available, and any such delay could adversely affect our business and operating results in any given period and negatively affect the price of our common stock.

Dependence on Distributors and Resellers. We rely primarily on our worldwide network of independent distributors and value-added resellers (“VARs”) to distribute and sell our products to end-users. Our distributors and resellers generally offer products from several different companies, including in some cases products that are competitive with our own products. In addition, many of the VARs are small organizations with limited capital resources. There can be no assurance that our distributors and resellers will continue to purchase products from us, or that our efforts to expand our network of distributors and resellers will be successful. Any significant failure on our part to maintain or expand our network of distributors and resellers could have a material adverse effect on our business and operating results and negatively affect the price of our common stock.

Reliance on International Sales. International sales and operations may be subject to risks such as the imposition of government controls, export license requirements, restrictions on the export of critical technology, less effective enforcement of proprietary rights; currency exchange fluctuations, generally longer collection periods, political instability, trade restrictions, changes in tariffs, difficulties in staffing and managing international operations, potential insolvency of international resellers and difficulty in collecting accounts receivable. Our international sales are also subject to more seasonal fluctuation than domestic sales. In this regard, the traditional summer vacation period, which occurs during our third fiscal quarter, may result in a decrease in sales, particularly in Europe. There can be no assurance that these factors will not have an adverse effect on our future international operations and consequently, on our business and operating results. This fluctuation may be material and negatively affect the price of our common stock.

Merger and Acquisition Related Risks. Our business and results of operations could be materially adversely affected in the event we fail to complete publicly announced acquisitions or to successfully integrate the business and operations of the merger or the acquisitions. In the future, we may continue to acquire or merge with existing businesses, products, and technologies to enhance and expand our line of products. Such mergers and acquisitions may be material in size and in scope. There can be no assurance that we will be able to identify, acquire, or profitably manage additional businesses or successfully integrate any acquired businesses into our business without substantial expenses, delays, or other operational or financial problems. Acquisitions involve a number of special risks and factors, including increasing competition for attractive acquisition candidates in our markets, the technological enhancement and incorporation of acquired products into existing product lines and services, the assimilation of the operations and personnel of the acquired companies, failure to retain key acquired personnel, adverse short-term effects on reported operating results, the amortization of acquired intangible assets, the assumption of undisclosed liabilities of any acquired companies, the failure to achieve anticipated benefits such as cost savings and synergies, as well as the diversion of management’s attention during the acquisition and integration process. We may not be able to operate the acquired businesses properly and may not be able to successfully recover amounts paid for such businesses. Some or all of these special risks and factors may have a material adverse impact on our business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock.

Similarly, we may dispose of assets, either assets we have historically used in the business or that we have acquired. Our business and results of operations could materially change depending on whether or not we are able to dispose of assets in an advantageous manner. In addition to obtaining an advantageous price for the assets to be disposed of, dispositions involve a number of special risks and factors, including searching for appropriate acquirers; managing the effect of the disposition on existing and proposed product lines and services, the divestiture of operations and personnel, adverse short-term effects on reported operating results, potential post-divestiture indemnification or liability for liabilities of divested operations, as well as the diversion of management’s attention during the disposition process. Some or all of these special risks and factors may have a material adverse impact on our business, operating results, and financial condition and, as a result, may negatively affect the market price of our common stock.

Stock Price Volatility. The trading price of our common stock has been highly volatile and has fluctuated significantly in the past. During the fiscal year ended November 30, 2002 our stock price fluctuated between a low of $0.35 per share and a high of $3.75 per share. We believe that the price of our common stock may continue to fluctuate significantly in the future in response to a number of events and factors relating to our company, our competitors, and the market for our products and services, many of which are beyond our control, such as, variations in our quarterly operating results; changes in financial estimates and recommendations by securities analysts; changes in market valuations of companies in our markets; announcements by us or our competitors of significant products, acquisitions, or strategic partnerships; failure to complete significant business transactions; departures of key personnel; purchases or sales of common stock or other securities by us; or news relating to trends in our markets. In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme volatility over the past twelve months. This volatility has often been unrelated to the operating performance of particular

companies. These broad and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments. The Company is not a party to any derivative financial instruments or other financial instruments for which the fair value disclosure would be required under Statement of Financial Accounting Standards No. 107 Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments (SFAS No. 107). All of the Company’s investments are in short-term, investment grade commercial paper, certificates of deposit and U.S. Government and agency securities that are carried at fair value on the Company’s books. Accordingly, the Company believes that the market risk of such investments is minimal.

Primary Market Risk Exposures. The Company’s primary market risk exposures are in the area of interest rate risk and foreign currency exchange rate risk. The Company’s investment portfolio of cash equivalents is subject to interest rate fluctuations, but the Company believes this risk is immaterial due to the short-term nature of these investments. The Company’s business in Europe is conducted in local currency. In Asia, business is conducted in U.S. currency. The Company has no foreign exchange contracts, option contracts or other foreign hedging arrangements. However, the Company estimates that any market risk associated with its foreign operations is not significant and is unlikely to have a material adverse effect on the Company’s business, results of operations, or financial condition.

Item 4. Control and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

(i) The Company provides accruals for all direct costs associated with the estimated resolution of known contingencies. The accrual is established at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated.

(ii) On June 7, 1995, a lawsuit was filed against the Company by Avid Technology, Inc. (“Avid”) in the United States District Court for the District of Massachusetts. The complaint generally alleges patent infringement by the Company arising from the manufacture, sale, and use of the Company’s Media 100 products. The complaint includes requests for injunctive relief, treble damages, interest, costs and fees. In July 1995, the Company filed an answer and counterclaim denying any infringement and asserting that the Avid patent in question is invalid. The Company is vigorously defending this lawsuit. In addition, Avid is seeking reissue of the patent, including claims that it asserts are broader than in the existing patent, and these reissue proceedings remain pending before the U.S. Patent and Trademark Office. On January 16, 1998, the court dismissed the lawsuit without prejudice to either party moving to restore it to the docket upon completion of all matters pending before the U.S. Patent and Trademark Office.

(iii) On October 12, 1999, a lawsuit was filed against the Company by McRoberts Software, Inc. (“MSI”) in the United States District Court for the Southern District of Indiana. The complaint alleges copyright infringement, breach of contract, and trade secret misappropriation. The complaint includes requests for unspecified monetary damages and enhanced damages, interest, costs and fees. An unfavorable verdict was filed on February 25, 2002 against the Company in the amount of $2.5 million. The Company and MSI filed post-trial motions. Those motions were ruled upon with the trial court reducing the total amount awarded by the jury but assessing prejudgment interest and attorney’s fees. The Company appealed the entire judgment, which approximates $2.8 million, and a hearing before the United States Court of Appeals for the Seventh Circuit occurred on December 12, 2002. The appeal remains outstanding and the Company is awaiting the verdict. The entire amount of the award has been placed in an escrow account pending judgment from the appellate court and approximately $2.8 million is included as restricted cash in the accompanying balance sheet at November 20, 2002.

During the year ended November 30, 2002, the Company settled litigation with the former shareholders of Wired, which was acquired by the Company in 2000. As part of the settlement, the Company assigned all rights to the Wired product line, intellectual property relating to Wired products and on-hand inventory related to the Wired product line to the former shareholders. In return, Wired granted the Company an irrevocable license to use the source code, technology, know how and intellectual property.

In addition, Wired promised to pay the Company a royalty of 5% of adjusted gross sales of the assigned products, not to exceed $1.2 million, plus the cost of the inventory assigned. Litigation settlement included in the Consolidated Statements of Operations for the three months ended February 28, 2002 represents the cost of inventory transferred, the net book value of remaining intangible assets associated with the acquisition, and legal fees associated with the settlement.

(iv) From time to time the Company is involved in other disputes and/or litigation encountered in its normal course of business. The Company does not believe that the ultimate impact of the resolution of such other outstanding matters will have a material effect on the Company’s business, operating results or financial condition.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

Exhibits required as part of this Quarterly Report on Form 10-Q are listed on the exhibit index on page 30.

b) Reports on Form 8-K

There were no reports on Form 8-K during the quarter ended February 28, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Media 100 Inc.


Date:	April 14, 2003	By:	/s/ Steven D. Shea
				Steven D. Shea
				Chief Financial Officer and Treasurer
				(Principal Financial Officer)

CERTIFICATIONS

I, John A. Molinari, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Media 100 Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

CERTIFICATIONS

I, Steven D. Shea, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Media 100 Inc.;

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls;

Date:	April 14, 2003

		/s/ Steven D. Shea
		Steven D. Shea
		Chief Financial Officer and Treasurer
		(Principal Financial Officer)

EXHIBIT INDEX

Number		Description

99.1		Statement Pursuant to 18 U.S.C. Section 1350, dated as of April 14, 2003

April 14, 2003

/s/ John A. Molinari

John A. Molinari

Chief Executive Officer and President

MEDIA 100 INC 10-Q